Lebanon — Signal Aviation’s long-running tax assessment battle with Lebanon is headed back to a lower court, though in a weakened state, after the New Hampshire Supreme Court ruled yesterday that the company had a right to pursue a claim that the city had violated its lease agreement when it dramatically raised the assessment.

Despite the high court’s decision to keep the Signal Aviation’s case alive, the city yesterday celebrated the ruling, saying it affirmed Lebanon’s right to increase the assessment.

The lawsuit stems from a 2006 move by the city to increase Signal’s tax assessment more than eleven fold from $77,000 to $868,000. Signal protested the reassessment on the grounds that the new tax level was unfair, and that it violated the terms of Signal’s lease that stipulated other airport businesses would not receive more favorable treatment from the city.

The high court yesterday upheld lower court rulings that found there was a legal basis for the higher assessment, but said the claims based on the language in the lease could proceed in Grafton Superior Court.

The city’s attorney, Adele Fulton, said that the “core” of Signal’s case had failed, and that the city was confident that the language of the lease would be upheld in lower court.

“The City is pleased with the decision received today from the Supreme Court,” Fulton said. “It affirmed the trial court’s ruling dismissing all tax claims of Signal — which was the core of its lawsuit at the Superior Court. All that’s left is secondary ... we believe those claims to be without merit.”

Stephen Girdwood, attorney for Signal Aviation, did not respond to a request for comment yesterday.

Signal Aviation, now known as Granite Air Center, was acquired by two longtime Signal employees last year. The company provides fuel, maintenance and other services to general aviation customers at the airport.

At stake is tens of thousands of dollars in annual tax revenue for the city, and potentially more in the future. Signal Aviation had initially sought to claw back more than $130,000 it paid in taxes to the city that Signal claims it never should have paid, Fulton said. Moreover, its annual tax bill is more than $20,000 under the disputed assessed values, which could dramatically dip further if Signal Aviation were to prevail.

In 2010, well after Signal Aviation had launched its legal battle against the new assessments, the city again raised it, from $868,000 to $1.7 million. Those new rates are also under appeal by Signal, at the New Hampshire Board of Tax and Land Appeals, although is not part of the case decided yesterday, Fulton said.

The high court’s decision comes as the City Council is debating the future of the Lebanon Municipal Airport, including a proposed runway expansion that could cost the city as much as $1.3 million. The airport, which has relied upon federal subsidies, has long struggled financially. City taxpayers paid $198,500 toward the airport’s operating cost in 2012, which is expected to increase to $215,500 this year.

The case hinges on language in Signal Aviation’s 20-year lease with the city, signed in 1996, that says the airport would not allow any other company to operate under “rates, terms or conditions” that were more favorable than Signal’s lease.

In 2006, the city increased the assessed value of Signal’s land from $77,000 to $868,000. That increase, Fulton said, came after the city realized that it had been dramatically undervaluing the land for years, and needed to impose the increase to bring it in line with fair market value.

The city both increased the per-acre rate, and attributed more land that it jointly shared with other organizations at the airport to Signal. The other aviation businesses at the airport are Sharkey’s Helicopters, Leading Edge Aviation Northeast, a flight instruction company, and Lebanon Hangar’s Associates, which owns a hangar that can accommodate six private airplanes.

Signal Aviation protested, saying that the city had assessed its land disproportionately against that of other airport tenants, thereby violating terms of the lease.

The company appealed to the City Council for abatements of its 2006 and 2007 tax bills, and was denied. Signal then appealed the council’s decision to the New Hampshire Board of Tax and Land appeals, but in 2009, the BLTA rejected the appeal, saying it had no purview over contract disputes.

In 2010, Signal filed a lawsuit in Grafton Superior Court, accusing the city of violating the lease agreement, saying that Lebanon had “provided more favorable and disproportionate tax assessments and taxation schemes to other entities at the airport.”

But a judge dismissed the claim, arguing that Signal was essentially trying to re-litigate the tax abatement issue, which falls under the BLTA.

That decision was only partially correct, the New Hampshire Supreme Court said yesterday. While Signal could not use its lease to protest the assessed value, it can use it to protest the decision to assign it more land.

“To the extent that Signal’s breach of contract claim sought relief from ‘unequal treatment’... Signal may pursue this claim without complying with the tax abatement statutory process,” Chief Justice Dalianis wrote in a seven-page opinion.

A hearing date in Grafton Superior Court has not been scheduled.

Yesterday’s decision comes less than one year after the city lost a similar New Hampshire Supreme Court case, filed by Lebanon Hangar Associates, protesting its $45,000 tax bill.